Iraq, Iran and the end of petrodollar: The waning influence of the USA in the Asian century


Iraq, Iran and the end of petrodollar: The waning influence of the USA
in the Asian century
15.05.2006 Source: URL:
http://english.pravda.ru/opinion/feedback/80289-petrodollar-0

Throughout history, empires and their civilisations have come and gone.
During the first part of the last century, the US quietly built its
empire, first in the North and Central Americas and in South America.
Soon after the Second World War, the US worked to maximise the
advantages it gained, and the power it assumed, between 1943 and 1945,
from its victory over Germany and Japan, and as a consequence of
massive Soviet casualties, and large British debt and financial burden
caused by the war. The USA assumed the leading role in the Western
world by, on one hand, containing the Soviet Union and preventing the
spread of communist revolution beyond the borders of the Soviet bloc;
and on the other hand, ensuring uncontested American supremacy within
the Western world.

During the Cold War years, there was little or no challenge to the
dominant position of the US in the Western world. However, with the end
of the Soviet Union in 1991, the knot tying the basic objectives of the
US global strategy together began to come unraveled. Once the communist
danger was off the table, American supremacy ceased to be an automatic
requirement of the Western system.

Since 20 September 2002, the US government has abandoned its former
multilateral approach to global affairs, and adopted an imperial
posture known as the so-called Bush doctrine.

This new agenda is based on militarist and imperial values with some
theocratic overtones. This agenda looks much like what some people see
in US foreign policy at the end of the 19th century, and the beginning
of the 20th, when the US actively sought to dominate the entire
Caribbean basin, Central America and even the western Pacific.

Six months after the Bush doctrine was announced, the new American
doctrine was applied as a justification for an unprovoked war against
Iraq by the neo-conservative administration of the US. Toppling Saddam
Hussein's regime without the support of the UN, and in the face of
strong opposition from traditional US allies, was a clear presentation
of a new unilateralist American foreign policy. The 'regime change' in
Baghdad was not an isolated event, but only an opening salvo in a much
broader neo-conservative agenda. The neo-conservatives 'advocate a
paradigm shift in which the United States spreads American values by
asserting American power-by force, if necessary'. This agenda seeks to
reshape American hegemonic practices according to old imperial
doctrines, but with new post-colonial political and military tools.
This was described most clearly by Irving Kristol, who is considered as
founder of the US neo-conservatism: 'it would be natural for the United
States to play a far more dominant role in world affairs, to command
and to give orders as to what is to be done. People need that.'

Since 2005, there is a looming crisis brewing over Iran. In the media
the phantom of Iran 'threat' is being amplified across the world. In
order to justify a military operation against Iran, the
neo-conservative rulers of the US have started a demonization campaign
against this country, presenting the latest incarnation of America's
enemy, in much the same way Saddam Hussein was in the run-up to the
invasion of Iraq. They have put a lot of effort into making people
believe that Iran is ruled by dangerously crazy people who are trying
to make a nuclear bomb, and that they would not hesitate to bomb one or
more US cities. In view of such a danger, the only answer is to wage a
preventive war. Speculations about possible U.S.-Israel attacks on Iran
have reached a stage of war propaganda by Western media.

A recent report by the Oxford Research Group revealed that any bombing
of Iran by U.S. forces, or by their Israeli allies, would result in the
unnecessary death of many innocent lives. 'A US military attack on
Iranian nuclear infrastructure would be the start of a protracted
military confrontation that would probably involve Iraq, Israel and
Lebanon as well as the United States and Iran, with the possibility of
western Gulf States being involved as well', says the report written by
Paul Rogers. The report also argues that Military deaths in. (the)
first wave of attacks against Iran would be expected to be in the
thousands, especially with attacks on air bases and Revolutionary Guard
facilities. Civilian deaths would be in the many hundreds at least,
particularly with the requirement to target technical support for the
Iranian nuclear and missile infrastructure, with many of the factories
being located in urban areas. If the war evolved into a wider conflict,
primarily to pre-empt or counter Iranian responses, the casualties
would eventually be much higher.

Many observers view the US neo-conservative clique and its agenda as a
conspiracy. This article, however, is based on the premise that they
are merely part of a larger equation of global systemic structures.
This view is rooted in an understanding that vested interests
representing the energy, electronics, weapons, and influential segments
of the media and communications industries in the US are always
entrenched in key sectors of government. These interests are concerned
with maintaining their privileged position. And key elements of the US
economic and political elite are now responding directly to changes in
global conditions that have arisen since the end of the Cold War. This
is not a conspiracy. It is only business as usual.

Since the end of the Cold War, the US has waged four wars - two in
Iraq, one in the former-Yugoslavia, and one in Afghanistan - and is
threatening more. All this aggression is not the result of a paranoid
theory, but simply a convergence of political and economic interests,
traveling under the rubric of 'war on terror'. This argument is not
based on the image of a few evil people, conspiring in secret, against
the people for their evil aims. However, diverging from conspiracy
theory does not ignore the fact that indeed there are real
conspiracies, criminal or otherwise. In particular, the US political
landscape is littered with examples of illegal political, corporate and
government conspiracies, such as Watergate, and the Iran-Contra
scandal.

Having said that the belief in conspiracy theories deflects attention
away from the real geopolitical grounds behind the political-economic
events. Conspiracy theories tend not to focus on impersonal forces like
political and economic structures, geopolitical forces, market
economics, globalisation, and other such abstract explanations of human
events. They are based on notions that all of human history is shaped
by secret societies. While real conspiracies have existed throughout
history, history itself is not a conspiracy.

The economic power of the United States was in stagnation since the
1970s and is in decline since the end of the Cold War. Particularly its
share of world trade and manufacturing is substantially less than it
was just prior to the end of the Cold War, and its relative economic
strength measured against the EU and the East Asian economic group of
Japan, China and other Southeast Asian countries is similarly in
retreat. The persistent use of US military power can be viewed as a
reaction to its declining economic power and not merely as a response
to the post-Cold War geopolitical picture. The American
neo-conservative leaders see the military power of the USA's trump card
that can be employed to prevail over all its rivals', and thus stop
this decline. This is what the Bush administration is trying to
achieve: to create a militarised world in which the strength of the US
military forces can change and re-define the rules of the game. This is
a clear goal, a specific agenda, which does not constitute a
conspiracy. It is merely the way in which the system currently works,
and the US administration is taking advantage of existing structural
opportunities. This article is an attempt to provide primarily a
macroeconomic explanation to the origins of and motivations behind the
recent US policies shaped by the neo-conservative Bush administration.

American "Dollar" Imperialism

"Imagine this: you are deep in debt but every day you write cheques for
millions of dollars you don't have -- another luxury car, a holiday
home at the beach, the world trip of a lifetime. Your cheques should be
worthless but they keep buying stuff because those cheques you write
never reach the bank! You have an agreement with the owners of one
thing everyone wants, call it petrol/gas, that they will accept only
your cheques as payment. This means everyone must hoard your cheques so
they can buy petrol/gas. Since they have to keep a stock of your
cheques, they use them to buy other stuff too. You write a cheque to
buy a TV, the TV shop owner swaps your cheque for petrol/gas, that
seller buys some vegetables at the fruit shop, the fruiterer passes it
on to buy bread, the baker buys some flour with it, and on it goes,
round and round -- but never back to the bank. You have a debt on your
books, but so long as your cheque never reaches the bank, you don't
have to pay. In effect, you have received your TV free. This is the
position the USA has enjoyed for 30 years."

Since the US emerged as the dominant global superpower at the end of
the Second World War, US hegemony rested on three unchallengeable
pillars: 1) overwhelming US military superiority over all its rivals;
2) the superiority of American production methods and the relative
strength of the US economy; 3) control over global economic markets,
with the US dollar acting as the global reserve currency.

Of these three, the role of the dollar may be the greatest among
equals. The US dollar is the world's reserve currency, meaning that
central banks all over the world hold huge amounts of dollars in
reserve. As a result of this situation, today America borrows from
practically the entire world without keeping the reserves of any other
currency. Because the dollar is the de facto global reserve currency,
US currency accounts for approximately two-thirds of all official
exchange reserves. America does not have to compete with other
currencies in interest rates, and even at low interest rates capital
flies to the dollar. The more dollars are circulated outside the US, or
invested by foreign owners in American assets, the more the rest of the
world has had to provide the US with goods and services in exchange for
these dollars. The US even has the luxury of having its debts
denominated in its own currency.

How does this work?

The United States runs a balance of payments deficit by spending more
money in other countries (buying their products, investing in them, or
giving them dollars) than they spend in the United States . - The extra
dollars are held by the countries' central banks. The banks do not ask
the United States to redeem them for gold or another currency. As long
as foreign banks accept and hold dollars as if they were gold, the
dollars act as reserves.

The US economy began to dominate the world economy in the early 20th
century. The US dollar was then tied to gold, so that the value of the
dollar neither increased nor decreased, but remained the same amount of
gold. Most money was paper, as it is now, but governments were
required, if requested, to redeem that paper for gold. This
'convertibility' put an upper limit on the amount of paper currency
governments could print in order to prevent inflation. This link
between paper money and gold was a product of law as well as custom.
The Federal Reserve, which was established in 1913, had to ensure that
every dollar of paper money was backed by at least forty cents of gold.
There was no tradition (as there is today) of continuous inflation. The
large levels of inflation and astronomic levels of government deficits
during the Great Depression, 1929-1931, rendered the support of US
dollars by gold impossible. By the early 1930s, this led the US
President Roosevelt to adjust the dollar/ gold ratio as he saw fit.
Until this point, the US may well have been a dominant power in the
world economy, but from an economics point of view, it was not an
empire. The fixed value of the dollar did not allow the US government
to extract economic benefits from other countries by supplying them
with dollars convertible to gold.

The American Empire was born, in a real economics sense of the term,
with Bretton Woods in 1945. After 1945, the dollar was not fully
convertible to gold, but was made convertible to gold only to foreign
governments. As a result of this, the dollar established itself as the
global reserve currency. No one planned this development. It came
directly from the fact that the US was the dominant world power: well
over half of all international money transactions were financed in
terms of dollar; the US produced more than half the world output; the
US also owned a large section of the gold reserves in the world. This
became possible because during the Second World War, the US had
supplied its allies with provisions, demanding gold as payment, thus
accumulating significant portions of the world's gold reserves. By
1945, the US had accumulated 80 percent of the world's gold, and 40
percent of the world's production.

The aggressive policies of the 1960s, however, put an increasing
pressure on the US dollar. The US economy experienced a cumulative
reserve deficit. In particular, the dollar supply was relentlessly
increased to finance America's war in Vietnam. Financially the Vietnam
War was a real mess. The US printed and spent more money than their
gold reserves allowed. By 1963, the US gold reserve at Manhattan had
fallen to alarmingly low levels -- it barely covered liabilities to
foreign central banks. By 1970 the gold coverage had fallen to 55%, by
1971 22%. Before the Vietnam War, the US had $30 billion in gold
reserves, but it spent more than $500 billion on the war alone. By this
time, the post-war reconstruction period had come to an end, and the
European and Japanese economies had improved their economic position
relative to the US, which had increased pressure on the US dollar. The
strain on the US financial system became evident in 1965, when French
President de Gaulle demanded gold from the US in exchange for $300
million in debt.

The situation reached a crisis point in 1970-71 when more foreign
central banks tried to convert their dollar reserves into gold. In
response to a massive flight from the dollar, the US government
defaulted on its payment on 15 August 1971 by cutting the link between
the dollar and gold. This was because it seems that there was no other
choice - the US government would not be able to buy back its dollars in
gold. If governments and foreign central banks tried to convert even a
quarter of their holdings at one time, the United States would not be
able to honour its obligations. Hence the Bretton Woods system was
ended. This was a serious crisis inspired by a significant loss of
confidence in dollar. As a result, the dollar was left 'floated' in the
international monetary market, which weakened the position of the
dollar as the hegemonic currency. Now the dollar had no firm backing
other than the 'full faith and credit' of the US government. From that
point on, the US had to find a way convincing the rest of the world to
continue to accept every devalued dollars in exchange for economic
goods and services the US needed to get from others. It had to find an
economic reason for the rest of the world to hold US dollars: oil
provided that reason, and the term petrodollar became the crucial link
in this.

Bulent Gokay
To be continued

Dr. Bulent Gokay is a Reader in International Relations, School of
Politics, International Relations and philosophy, Keele University,
United Kingdom. He can be contacted by e-mail at
b.gokay@xxxxxxxxxxxxxxxx

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